Another student guest blogger. See the comment thread for my own remark on this topic, which promises to be very interesting over the coming year. –RJB

One of FASB’s current projects involves providing guidance to accounting issues such as accounting for Emissions Trading Schemes. This project is important because many environmental and ecological accounting concepts are ambiguous in nature. As societal demand grows for more corporate and political environmental accountability, accountants will require increasing guidance on how to account for accounting information associated with economic instruments such as cap and trade schemes.

Such environmental economic instruments have been better explored in the environmental economics literature compared to the environmental accounting literature. This is unfortunate because accounting academicians may be a valuable resource in the development of efficient, effective, and practical economic instruments that aim to address environmental issues. In order to provide beneficial and tangible economic instruments, environmental economists will need to use economic theory that is consistently grounded in an ecological accounting reality. This merging of economics and accounting will be more successful if accounting scholars take a more prominent role in analyzing and exploring environmental accounting information systems that yield viable economic results.

If it is acknowledged that accounting scholars are arriving tardy in addressing environmental issues, then it may be helpful for the literature to rigorously discuss accounting’s basic and fundamental role in understanding the accounting ramifications associated with the development of environmental economic instruments such as the cap and trade schemes. One suggestion is to begin broadly comparing and contrasting accounting’s role in other environmental economic instruments, such as traditional command and control regulatory approaches. Basic knowledge of different environmental economic instruments can be found in an introductory environmental economics textbook, such as Turner, Pearce, and Bateman’s Environmental Economics. An older edition (1993) can be purchased cheaply on sites such as Amazon.

There are many research opportunities for accounting researchers to help inform the debate on how best to develop accounting standards aimed at addressing environmental economic instruments such as the cap and trade schemes.

My own guess is that accountants are going to be very, very slow in attempting to account for environmental effects that aren’t resulting in liabilities very directly through lawsuits or fines. But I wouldn’t be at all surprised to see emissions trading schemes arise as the FASB’s next political hot potato.

I have followed the political wrangling a little bit, and one of the current debates right now is whether the government will auction off rights to emit greenhouse gasses, or whether they will give them away. My understanding from David Elsbree (FASB Practice Fellow who has been focusing on this issue) is that there isn’t much of an accounting issue if the rights are given away–just that firms can’t report a gain on receiving them. But if the rights are to be auctioned off, firms will have to report a liability once they are presented with the legal requirement to either buy rights or pay fines.

This means that passage of the act will have an immediate effect on firms financial statements! So looking into my crystal ball, it isn’t hard to see a lot of pressure on the FASB–the government will want those liabilities to look small, while those who want to defeat legislation will want the liabilities to look large while they still have a chance to quash the auction approach, but then naturally make them look small if the auction approach actually passes.

Young researchers looking for a set of research questions that will keep them employed for the next decade–take note!

I agree that any environmental accounting changes (beyond the direct and tangible financial liabilities of environmental effects) will be a slow and potentially arduous process. A big factor to consider in this process is the underlying mindset of current accounting systems. Accounting systems reflect a deeply rooted business culture that is heavily dependent on familiar and traditional financial measurements. While this evolved accounting system has definitely provided fruitful results in a capitalistic society, it is important to note that every system has perceived winners and losers. Many proponents of pro-environmental efforts feel that the environment is a big loser in a capitalistic system. Although I believe that capitalism is certainly not a perfect system, I personally do not feel that the “capitalism vs. environmentalism” dynamic needs to be so adversarial in nature (pun not intended).

Whether intentional or not, part of my accounting research agenda includes trying to show ways in which environmental considerations can absolutely be accomplished within the rules of capitalism. I believe a more moderate approach to addressing environmental accounting issues (by aiming for ‘win-win’ solutions between the environment and capitalism) will be more effective in achieving tangible results, although I do encourage ideas that may be branded more ‘radical’ by the establishment. I believe this is the beauty of the ivory tower—-there’s room for all of us at the environmental accounting table, and we can each contribute to advancing both knowledge and practical solutions in different ways.

Although I am admittedly incredibly biased in pursuing environmental accounting research, I firmly believe that there are many research opportunities available to the accounting scholar in this field. Not only are environmental accounting topics timely (e.g. society’s recent demand for environmental awareness) and relevant (e.g. the accounting implications of auctioning or giving away emissions rights), but very few accounting scholars (at least on this side of the pond) are exploring these opportunities. I believe environmental accounting is the Wild West of accounting research. While there are certainly publishing risks involved with new topics (i.e. will the journals be receptive to non-mainstream accounting topics such as environmental accounting?), I think the potential benefits far outweigh the costs.

Your comment on the emissions rights debate is a prime example of the opportunities in environmental accounting research. This new world seems to beg for experimental research, and your initial thoughts on the trading schemes could lead to contributions in accounting (e.g. earnings management approaches to recording emissions rights obtained via auctioning), economics (e.g. market effects of auctioning vs. giving emissions rights), and even political science (e.g. the dynamics of environmental lobbying). As someone with a biology background, I enjoy this cross-disciplinary approach to finding solutions that may benefit a number of fields, while concentrating on developing the literature in a subtopic as unique and fulfilling as environmental accounting.

As I will argue at the upcoming Doctoral Consortium, academic research is so much work that you really need to do what you love. Clearly, you love environmental research. I think the real question you will need to struggle with is “can I find ways to conduct environmental research that will be publishable in peer-reviewed journals?” After all, if you can’t do that, you can’t keep an academic job that allows you to continue conducting the research you love.

I wonder whether environmental research fits best with managerial accounting (rather than financial reporting). Can you frame it in terms of key performance indicators, the balanced scorecard, etc.?

I agree that I will need to find a balance between my research interests and publishable research. I believe this balance is very achievable, but I will certainly need to be cognizant of presenting (adapting?) my research in a more mainstream light.

I have indeed been exploring managerial accounting in my environmental research. My dissertation will involve two main studies. One study explores more effective ways to present environmental accounting information in sustainability balanced scorecards. The other study looks at preference reversals in an environmental cost accounting context. Specifically, if cost accountants aren’t careful in how they present environmental accounting information to managers, then the managers may give different evaluations based on the same information simply by presenting that information differently.

I think it would be best for me to focus on exploring environmental accounting in a managerial accounting context for now. However, one day (maybe post-tenure?) I’d like to look at environmental auditing and maybe even financial reporting implications of environmental standards.

I believe that environmental accounting (or generally speaking any other accounting research) could be a promising area for research and successful publications. One way to warrant these successful publications is to articulate the environmental accounting (or any accounting research) with other on-going accounting research (mostly hot-topic research). For example, exploring differences in managerial behaviors in reporting the environmental costs according to different cultural dimensions “Hofstede’s cultural dimensions”, earnings management and environmental reporting, earnings persistence and environmental costs,…etc. However, I think using archival methodology would increase the credibility of such research as environmental accounting since it presumably has a direct effect on both the firm and society.

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